G20 officials begin push for new 'peer-review' process

Private discussions are likely on the weak dollar and other currency issues

WilliamL. Watts

WASHINGTON (MarketWatch) -- Over the past year, leaders of the Group of 20 top industrial and developing nations have held a series of high profile summits filled with handshakes and toasts designed to show that they can cooperate for the good of the global economy.

This weekend, the leaders have sent their finance ministers and central bank governors to St. Andrews on the windy coast of Scotland to hammer out actual plans that would make these plans a reality.

Foreign-exchange-related issues aren't on the official agenda, participants say. But analysts contend concerns about the weak dollar and other matters will likely make for some frank closed-door currency discussions.

On the front-burner, however, is a pledge from the G20 to give life to a robust 'peer-review' process, advertised as a method for reining in any country whose policies threatened to damage global growth.

This type of cooperation has been tried in the past, with little success because there were no "teeth" in the enforcement process.

Such efforts are "clearly a good idea, but it remains to be seen how much difference this will make on the ground," said Julian Jessop, chief international economist at Capital Economics in London, in a research note. "After all, there have been many public commitments over the years to do more to coordinate policies and rebalance growth."

A senior U.S. Treasury official told reporters this week that the G20 finance ministers, who will have dinner together on Friday night and hold a working session on Saturday, will work on the nuts and bolts of the process.

The idea is that countries will lay out their economic policies and intentions, as well as the key data to watch.

The International Monetary Fund has been tasked with the job of pulling the data together.

"The IMF will assist the process of pulling data together and evaluating it and a mutual assessment process will need to be developed and fleshed out," the official said.

Officials have seven months to pull a final product together in time for the next leaders' summit in June 2010.

No exit

U.K. Chancellor of the Exchequer Alistair Darling, who is hosting the meeting, said officials would discuss "principles to manage" exit strategies needed to withdraw fiscal and monetary stimulus.

Analysts said this was a signal that exit strategies won't be triggered for months.

"It's important to think about and to work on possible exit strategies. It's too soon to implement them," Caroline Atkinson, an IMF spokeswoman told reporters Thursday.

"Even if national governments and central banks did already have a clear idea of what they are going to do, and when (which we doubt), they are unlikely to reveal this first at an international forum rather than, say, a budget or monetary policy meeting," said Capital Economics' Jessop.

The currency issues

Meanwhile, many G20 members have expressed unease about the recent fall in the dollar. This puts pressure on their exports.

For analysts, the litmus test for any new peer review program will be China's foreign-exchange policy.

China has essentially re-pegged its currency to the dollar in the wake of the global downturn after allowing its currency to slowly strengthen from 2005-2007. With the dollar under selling pressure and China's yuan fixed, the other major global currency, the euro, has been pushed higher.

"Of particular interest is whether the Europeans complain further about the euro bearing the brunt of the dollar's downward adjustment," said Jane Foley, research director at Forex.com in London.

Analysts said President Obama's visit to China next week could be a pivotal point on the currency issue.

Wanting to put the issue squarely on the table, Brazilian officials come to the meeting after recently imposing a 2% tax on foreign purchases of bonds and equities in an effort to contain rising equities and appreciation by the nation's real currency.

They plan to urge the G20 to take steps aimed at preventing the Brazilian and other commodity-related currencies from appreciating too sharply against the dollar and China's yuan, according to news reports.

"There are countries that want to talk about it [currency issues] explicitly, not least Brazil, who obviously want to address fairly directly the issue of pegged currencies, floating currencies, and trying to stem speculative flows," said Simon Derrick, currency strategist at Bank of New York Mellon in London.

"While there may well be no communique on foreign exchange policy, I think there definitely could be a series of comments," he said.

The official communique, however, isn't likely to offer much on the currency front, or otherwise, Jessop said.

"We expect the statement following the G20 meeting to comprise the usual 'motherhood and apple pie' platitudes that should offend or impress no one," he said, recalling the Pittsburgh summit's pledges to avoid "boom and bust" and to ensure the ability of hard-working families to "find decent jobs."

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